Accenture Preview: Order Book Pipeline In Focus

Accenture (NYSE:ACN) is set to announce its Q4 FY2013 results on September 26, 2013. In Q3, the company reported revenues below its guidance as soft demand continued to plague its business. While the outsourcing business for Accenture continues to do well, the consulting business is feeling the brunt of tepid IT spending. As a result, the company revised its 2013 revenue guidance down in the last earnings announcement.

In the upcoming earnings call, we will be closely monitoring growth in Accenture’s outsourcing and consulting businesses as it will give us a fair indication of whether global IT spending is on the mend. Additionally, Accenture reported a strong pipeline of new bookings in the previous quarter and most of these bookings were long-term in nature. We will also continue to closely monitor the new order pipeline for outsourcing and consulting businesses.

Accenture expects revenues of $6.7-$7 billion for Q4. It expects bookings between $31-$34 billion for 2013, and EPS to fall to $4.9 – $4.94. Additionally, Accenture has lowered its revenue growth guidance to 3%-4% for 2013. Considering the long-term nature of contracts booked, we expect revenue growth to be at the lower end of this guidance.

According to our estimates, the outsourcing division contributes approximately 40% to Accenture’s value. Net revenues from this division were around $12 billion in 2012, and we believe that it will continue to rise and reach around $20 billion by the end of our forecast period. According to Gartner, worldwide IT outsourcing (ITO) market will reach $288 billion in 2013. [1] However, near term factors such as economic conditions, an evolving technology model and constrained IT budgets will continue to temper growth.

Accenture continues to lead the outsourcing market. The outsourcing division has reported consistent double digit growth aided by strong order book growth. The company booked $4.4 billion worth of fresh contracts in Q3 2013, and we expect that outsourcing revenues will continue to deliver growth in Q4 as well. However, we will be closely monitoring its outsourcing business as it will help ascertain the growth in the global outsourcing industry.

Consulting Revenues To Decline

Management and technology consulting are important drivers for Accenture’s value and account for around 46% of our price estimate combined. In Q3, the consulting business reported a 2.4% y-o-y decline in revenues to $3.8 billion. Additionally, Accenture booked $3.9 billion in new orders for this business which were $400 million less than expected new orders. Most of the new contracts that Accenture had signed were long-term in nature, which mean that it will a take longer time to report revenue against new bookings. The imbalance in contract ‘types’ has led to a visible decline in quarterly consulting revenue as the pipeline for faster converting medium-term and short-term contract is low. While we expect that revenues from consulting will continue to remain tepid due to the nature of the contracts signed, we expect the company to report a healthy build-up in contracts during the earnings announcement. Additionally, we will continue to closely monitor the consulting division’s book to bill ratio, which indicates the revenues from previous bookings.

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